Vulture funds surrender $30 mln in new WaMu reorganization plan
Just before midnight on Monday, Weil, Gotshal & Manges filed the seventh amended plan of reorganization for Washington Mutual Inc, the bankrupt onetime parent of WaMu Bank. The seventh time may just be the charm for WMI — according to the accompanying disclosure statement, everyone is now on the reorganization bandwagon, including, for the first time in this three-year case, the equity holders. As you may recall, WMI equity holders and their lawyers at Susman Godfrey have until now stood staunchly in the way of WMI’s reorganization. In the new plan, equity holders will receive an additional $75 million, which WMI senior and subordinated bondholders are kicking into the company that will emerge from Chapter 11 and will be owned by shareholders of the old WMI.
That $75 million sweetener, plus a $125 million credit facility the reorganized company can tap (and some smaller enhancements as well), is the result of a stunning ruling the equity committee won in March from Delaware federal bankruptcy judge Mary Walrath. Walrath refused to confirm WMI’s previous plan because she found shareholders had a colorable claim that four distressed-debt hedge funds had engaged in insider trading in WMI subordinated notes. The equity committee asserted a claim for “equitable disallowance,” arguing that the hedge funds learned about progress in WMI’s settlement talks with JPMorgan Chase from their lawyers, and then traded on the basis of that information. The judge concluded that Susman Godfrey had presented sufficient evidence that the funds “acted recklessly in their use of material nonpublic information” to keep alive the shareholders’ claim.
The four funds — Aurelius, Owl Creek, Appaloosa, and Centerbridge — didn’t think much of Walrath’s reasoning. In scathing briefs requesting leave to appeal, the hedge funds said the judge had ignored the facts and misinterpreted federal securities laws. “The absence of any legal support for the bankruptcy court’s decision is palpable,” three funds asserted in a joint brief.
So how much were the equity committee’s claims against the funds worth? Based on the new disclosure statement, less than $30 million. The hedge funds own about 80 percent of senior subordinated WMI debt, according to analyst Kevin Starke of CRT Capital Group. Subordinated debt holders are contributing $35 million of their WMI recovery to the reorganized company to be owned by old WMI shareholders. So the hedge funds’ share is about $29 million, according to Starke. (The funds are also backing the $125 million credit facility cited in the disclosure statement.)
Senior noteholders are contributing the other $40 million of the $75 million equity committee sweetener. But as Starke points out, that’s proportionally much less than the subordinated noteholders; $40 million is just under 1 percent of the senior noteholders’ projected recovery, while subordinated debt holders are giving up a little more than 2 percent of their recovery.
Starke said the equity committee, which will own a company capitalized with a total of $285 million when WMI emerges from Chapter 11, should be satisfied with the $75 million enhancement. “That’s a good outcome, considering how weak these insider trading claims were likely to be,” he said.
Equity committee counsel Edgar Sargent of Susman Godfrey said his clients are “very happy” with the new plan. In addition to the $75 million bondholder contribution to the reorganized company, other creditors are contributing $10 million. “The reorganized debtor is going to be well-capitalized, and we think there’s now a chance for shareholders to receive real recovery,” he said. (The reorganized company will likely “acquire or build assets in the financial or insurance spaces,” Sargent said, although he cautioned that it’s too early to say for sure.) In addition, Sargent said, equity holders will control any subsequent antitrust or business tort claims WMI brings against third parties through its two seats on the litigation committee of the WMI liquidating trust.
I left messages with WMI bankruptcy counsel Brian Rosen of Weil and lawyers for the four hedge funds (Paul Hastings for Appaloosa; Schulte Roth & Zabel for Owl Creek; Latham & Watkins for Centerbridge; and Kramer Levin Naftalis & Frankel for Aurelius). Latham referred my call to a Centerbridge spokesman and the others didn’t respond.
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